Fin/Inv

This is the sort of thing that, in my opinion, makes meaningful economic recovery impossible.  (Click for a larger copy)

Here's what it says:

To continue to provide our customers with access to credit, we have had to adjust our pricing.

....

These changes include an increase in the variable APR for purchases to 29.99% and will take effect November 30, 2009. 

(It then goes on to say that if you pay on time you can get 10% of your interest charges back, which lowers the effective rate by about 3%.)

I have multiple copies of this letter, all on the same theme - 30% interest rates, vastly higher than they were.

The obvious message in this letter is simple: Those who are responsible and can pay their bills will be subsidizing those who cannot - that is, you, the responsible cardholder, will pay the deadbeat's bill!

Citibank has 92 million cards in circulation and is #4 in market share in terms of purchase volume, with 11.05% of the total.

Overall, consumers hold an average of 5.4 revolving (credit) cards.  Half of all undergraduates in college have 4 or more cards. 

Average card debt per household, including households that have no cards at all, is $8,329.  For households with one or more cards, it is $10,679, both figures at the end of 2008. 

Of the 73% of families with credit cards, 60.3% carried a balance.  This means that for those with balances, the average balance is nearly $18,000.

If the previous interest rate on those cards was around 20% and is now 29%, the average family with a balance (about 44% of all households) was paying $3,600 in interest charges previously, but now will be paying $5,220, and increase of $1,620 a year or $135.00 a month.

There are approximately 116 million households in the US.  As a consequence the decrease in disposable personal income attributable to this sort of interest rate change is approximately $113 billion, or a bit under 1% of GDP. 

And that's only the direct cost of the interest.  What cannot be measured is the impact on consumer spending that comes from changes in consumer behavior - that is, this is only the interest component of the change in rate. 

If this interest rate change prompts people to pay down just 25% of their credit card debt over two year's time the impact on GDP simply from paying down the debt as opposed to holding it level will raise the impact to approximately 1.9% of GDP, or about $270 billion annually in foregone consumer spending.

Good luck with your "recovery" thesis folks.

Submitted by Edward Harrison of Credit Writedowns

John Meriwether, the 62-year old former Salomon bond trader and LTCM wizard is back for, what is this, his fourth go round.

For those of you who don’t remember the 1980s, John Meriwether was the biggest of the ‘big swinging dicks’ on Wall Street, leading Salomon Brothers to huge profits in its fixed income division. Lionized in the eponymous book “Liar’s Poker” and inspiration for Bonfire of the vanities, Meriwether and Salomon’s rise marked the change from a bulge bracket culture dominated by deal makers and IBD (Investment banking Division) white shoe bankers to one dominated by the foul-mouthed traders and math geek quants of fixed income.  The change at Goldman Sachs from a firm dominated by IBD to one dominated by trading is testament to this. Unfortunately for Meriwether, his career path since reaching the top has been rather rocky.

First there was the enormous Treasury bond scandal, in which Meriwether subordinate Paul Mozer put in fake Treasury bids on behalf of clients in an attempt to corner the market for on-the-run securities. Lax oversight got Meriwether a $50,000 fine and Salomon a $290 million fine, the largest ever to that date. Salomon head John Gutfreund resigned and Warren Buffett came in to serve as Chairman (Phibro which was recently offloaded to Occidental Petroleum by Citigroup is a Salomon Brothers company, by the way).  Meriwether left.

Soon, Meriwether was back at it at Long-Term Capital Management, the Greenwich-based hedge fund he founded in 1993 and which was famously leveraged 100 to 1, not including derivatives exposure of $1 trillion on a capital base of $5 billion. This company produced spectacular 40+% profits year after year before going spectacularly bust in 1998 after Russia devalued its currency and defaulted on its debt (see Frontline’s recent video which has a part on LTCM).

Meriwether miraculously was able to start again, literally the next year, helped by a bubble in shares which increased appetite for risk. He started JWM Partners in 1999. After years of gains, this fund too produced staggering losses (44% last year) and was liquidated.

Now that shares are up some 60% in US markets, guess what, John W. Meriwether is back… and he’s taking investors.  This one is called JM Advisors Management, also based in Greenwich.

The fund is expected use the same strategy as both LTCM and JWM to make money: so-called relative value arbitrage, a quantitative investment strategy Mr Meriwether pioneered when he led the hugely successful bond arbitrage group at Salomon Brothers in the 1980s.

The strategy, described by the Nobel Prize-winning economist Myron Scholes as being akin to a giant vacuum cleaner “sucking up nickels from all over the world”, can be highly successful in periods following market dislocations.

Relative value trades profit by betting on unusual pricing relationships between securities, anticipating a return to an historically modelled “normal” state between them.

Traders say the strategy has the potential to deliver huge returns in the current market, with many banks’ proprietary trading desks having scaled back their operations and far fewer hedge funds in existence.

I bet the money is pouring in.

The timing here is interesting given what is happening in mortgages and banking. Meriwether was at the center of the creation of the mortgage-backed securities market with his colleague Lewis Ranieri. Franklin Bank Corp., a bank run by Ranieri was recently seized by the FDIC as it ran into difficulties in the financial crisis due to poor lending. The seizure cost taxpayers $1.6 billion.

However, the much more important tidbit on the mortgages front comes in terms of foreclosure activity. Because of an August ruling by the Kansas Supreme Court (Yves linked out to a story on this today), we could be seeing some major changes in the way foreclosures happen. A post at Credit Writedowns, “Why mortgages aren’t modified and what a ruling stopping foreclosures means” chronicles the case in greater detail.

Sources

Meriwether setting up new hedge fund – Sam Jones, FT (also with the FT Alphaville Team)

Meriwether – FT Lex

CNBC has been trying hard to make everyone forget last year ever happened, and that the global financial system is one big ponzi scheme. And by the look of luxury home sales in the Hamptons they have finally succeeded. Bloomberg reports that "home sales in the Hamptons, the Long Island beach retreats favored by Hollywood celebrities and Wall Street financiers, surged 32 percent in the third quarter as deal seekers landed discounted properties."

With buyers out in force, sellers have else emerged:

Luxury sales throughout the Hamptons and Long Island’s North Fork climbed 31 percent in the quarter to 46 transactions.

The median luxury price dropped 11 percent from a year earlier to $4.28 million, according to the survey. Miller defines the luxury market as the top 10 percent of sales, which in the third quarter included homes priced at $3.2 million or more.

High-end sellers who cut their price did so by an average of 17 percent compared with 14 percent a year ago.

Yet if you are lucky enough to be on the receiving end of the middle class trade, you are in luck: there still are beachfront properties where you can invest the wealth transfer capital.

Hamptons sales peaked in the second quarter of 2004, when 1,052 properties were traded, Miller said.

While this year’s third-quarter sales rose, so did the inventory of unsold homes. Listings climbed 11 percent from a year ago to 1,735 properties.

“You had people who had been trying to market their property for the past couple of years who re-entered the market,” Miller said. “You got the ‘Go’ signal with all this activity.”

At the current sales pace, it would take almost 16 months to sell all the Hamptons homes listed, Miller said.

Another critical forward looking indicator, the "Wall Street Prosperity Via Middle Class Rape Index" aka the Craig's List hooker hourly going rate, is currently being calculated by several hundred SPARC stations, and results will be tabulated shortly for popular consumption.

VIA OVERNIGHT MAIL AND E-MAIL

October 22, 2009

The Honorable Christine Varney
Assistant Attorney General
Antitrust Division
U.S. Department of Justice
950 Pennsylvania Avenue, NW, Suite 3109
Washington, DC 20530

Molly Boast, Esquire
Deputy Assistant Attorney General for Civil Matters
Antitrust Division
U.S. Department of Justice
950 Pennsylvania Avenue, NW, Room 3210
Washington, DC 20530

Dear Ms. Varney and Ms. Boast,

We are writing on behalf of the American Booksellers Association, a 109-year-old trade organization representing the nation's locally owned, independent booksellers. A core part of our mission is devoted to making books as widely available to American consumers as possible. We ask that the Department of Justice investigate practices by Amazon.com, Wal-Mart, and Target that we believe constitute illegal predatory pricing that is damaging to the book industry and harmful to consumers. We are requesting a meeting with you to discuss this urgent issue at your earliest possible opportunity.

As reported in the consumer and trade press this past week, Amazon.com, WalMart.com, and Target.com have engaged in a price war in the pre-sale of new hardcover bestsellers, including books from John Grisham, Stephen King, Barbara Kingsolver, Sarah Palin, and James Patterson. These books typically retail for between $25 and $35. As of writing of this letter, all three competitors are selling these and other titles for between $8.98 and $9.00.

Publishers sell these books to retailers at 45% - 50% off the suggested list price. For example, a $35 book, such as Mr. King's Under the Dome, costs a retailer $17.50 or more. News reports suggest that publishers are not offering special terms to these big box retailers, and that the retailers are, in fact, taking orders for these books at prices far below cost. (In the case of Mr. King's book, these retailers are losing as much as $8.50 on each unit sold.) We believe that Amazon.com, Wal-Mart, and Target are using these predatory pricing practices to attempt to win control of the market for hardcover bestsellers.

It's important to note that the book industry is unlike other retail sectors. Clothing, jewelry, appliances, and other commercial goods are typically sold at a net price, leaving the seller free to determine the retail price and the margin these products will earn. Because publishers print list prices indelibly on jacket covers, and because books are sold at a discount off that retail price, there is a ceiling on the amount of margin a book retailer can earn.

The suggested list price set by the publisher reflects manufacturing costs -- acquisition, editing, marketing, printing, binding, shipping, etc. -- which vary significantly from book to book. By selling each of these titles below the cost these retailers pay to the publishers, and at the same price as each other, and at the same price as all other titles in these pricing schemes, Amazon.com, Wal-Mart, and Target are devaluing the very concept of the book. Authors and publishers, and ultimately consumers, stand to lose a great deal if this practice continues and/or grows.

What's so troubling in the current situation is that none of the companies involved are engaged primarily in the sale of books. They're using our most important products -- mega bestsellers, which, ironically, are the most expensive books for publishers to bring to market -- as a loss leader to attract customers to buy other, more profitable merchandise. The entire book industry is in danger of becoming collateral damage in this war.

It's also important to note that this episode was precipitated by below-cost pricing of digital editions of new hardcover books by Amazon.com, many of those titles retailing for $9.99, and released simultaneously with the much higher-priced print editions. We believe the loss-leader pricing of digital content also bears scrutiny.

While on the surface it may seem that these lower prices will encourage more reading and a greater sharing of ideas in the culture, the reality is quite the opposite. Consider this quote from Mr. Grisham's agent, David Gernert, that appeared in the New York Times:

"If readers come to believe that the value of a new book is $10, publishing as we know it is over. If you can buy Stephen King's new novel or John Grisham's 'Ford County' for $10, why would you buy a brilliant first novel for $25? I think we underestimate the effect to which extremely discounted best sellers take the consumer's attention away from emerging writers."

For our members -- locally owned, independent bookstores -- the effect will be devastating. There is simply no way for ABA members to compete. The net result will be the closing of many independent bookstores, and a concentration of power in the book industry in very few hands. Bill Petrocelli, owner of Book Passage in Corte Madera, California, an ABA member, was also quoted in the New York Times:

"You have a choke point where millions of writers are trying to reach millions of readers. But if it all has to go through a narrow funnel where there are only four or five buyers deciding what's going to get published, the business is in trouble."

We would find these practices questionable were they taking place in the market for widgets. That they are taking place in the market for books is catastrophic. If left unchecked, these predatory pricing policies will devastate not only the book industry, but our collective ability to maintain a society where the widest range of ideas are always made available to the public, and will allow the few remaining mega booksellers to raise prices to consumers unchecked.

We urge that the DOJ investigate and request an opportunity to come to Washington to discuss this at your earliest convenience.

Sincerely,

ABA Board of Directors:

Michael Tucker, President (Books Inc.--San Francisco, CA)
Becky Anderson, Vice President (Anderson's Bookshops--Naperville, IL)
Steve Bercu (BookPeople--Austin, TX)
Betsy Burton (The King's English Bookshop--Salt Lake City, UT)
Tom Campbell (The Regulator Bookshop--Durham, NC)
Dan Chartrand (Water Street Bookstore--Exeter, NH)
Cathy Langer (Tattered Cover Book Store--Denver, CO)
Beth Puffer (Bank Street Bookstore--New York, NY)
Ken White (SFSU Bookstore--San Francisco, CA)CC:    Oren Teicher, CEO, American Booksellers Association
Len Vlahos, COO, American Booksellers Association
Owen M. Kendler, Esquire, Antitrust Division, U.S. Department of Justice

This is weird: My RSS feed leapt this week from low 40ks to 56,000.

I have no idea why; perhaps it was yesterday’s Bloomberg Surveillance guest hosting (podcast here) — but that is just a wild guess on my part.

Recall that last week, after the Goldman bonus debate, it popped from 41k to 46k.

The mere fact that "special masters" are even labeled "Czars" by the administration should be warning enough.  One might guess either that the leaders of the administration have a very poor grasp of the historical import and meaning of the term, or they have the unabashed arrogance to wield it notwithstanding its many negative and authoritarian connotations.  Not that the Obama administration is alone in its use of the term, but it has now exceeded the high water mark for Czar populations set by the Bush Administration. That we now have one in the process of dictating executive pay, indeed any compensation structure at all, is deeply concerning.  So when Obama administration’s "Special Master for Executive Compensation" out and dictates that his Papal Bull on pay cuts for executives of banks receiving government assistance should become the model for Wall Street and for the United States generally, well:

1. Despite the protestations nearly since January that no one in the Obama administration would be meddling with compensation in private enterprise, you should have seen this coming months ago.

2. We told you so.

We think it painfully congruent that Czar Nicholas Feinberg II comes hot off the throne of another Czarist dais to his present exultation.  More appropriate still that he brings his experience from the 9/11 victims fund to his present post.  "I am extremely sensitive to the public outrage," he quipped to Bloomberg.  Excellent.  We are most pleased, Your Imperial Majesty, that it is you, given your sensitivity, pulling the levers on the longer-term variables in this complex system. 

The fact is, much as the public may yearn to cut bankers down to size, and much as getting at someone's cash is, after all, the most vicious and ghastly punishment there is in the United States, this will all end in tears.  The proper way to have dealt with executive pay (which is a tiny fraction of corporate cost in any event) would have been to permit these institutions to fail.  Period.  You might notice that no one needs to modify Dick Fuld's pay today.

Citizens of the United States do not need a "special master" to deliver them a spanking for losing money.  Nor do they need a handout from government coffers.  It's time for enterprise in the United States to leave the nest and forgo both the extra bedroom that Mom will keep just like you left it "in case," and the time out room Dad will send you to if you blow it again.  Punishing firms that accepted government funds, effectively under duress, and who have managed to actually pay those funds back (at a gain to the taxpayer, you might also notice) is a dangerous act.  It is a clear sign that political whim and "sensitivity to public outrage" is driving economic policy.  Again, this will all end in tears.

Recovery.org has some useful data to track the efficacy of the administration's stimulus program. Not only can the 5.93 people (not in millions, thousands, hundreds or even tens) in Rhode Island whose jobs the Federal Government managed to "save" send personal thank you letters to American taxpayers, but they can read all about the happy response on Amazon's Kindle, which apparently every single human being in the world is a proud owner of, which seems sufficient to justify the retailer's 60x forward P/E (once the short squeeze is finished after hours, that's roughly where the stock should be trading; in other news at least Americans can finally get edumacated with everyone finally reading just to look cool).

In all seriousness, is this chart from recovery.org, proudly pasted on the front page, supposed to make Americans happy about the amazing misuse of taxpayer funds to only "create" 30,000 jobs in America (never mind that actual unemployment by state continues to skyrocket, putting all claims about saved jobs very much in the highlight reel on the Comedy Channel)? And just how does the government provide 0.93 jobs? Can Rhode Islanders round up that particular employee or does the 0.07 account for the weighted average time spent by "saved employees" playing Solitaire?

Either way, another phenomenal demonstration of efficiency by the administration.

 

Keeping trading journals is an excellent way of tracking performance, evaluating strengths and weaknesses, and setting goals for development. Here are a couple of resources that might be helpful for traders looking to become more organized in their quest for the next level of performance:

* StockTickr - This application allows traders to keep a journal, calculate performance, and even automate trading ideas;

* Stock Trade Journal - This application allows traders to enter trades, calculate P/L, keep notes, and track their performance;

* TradePerformance - This application produces extensive performance reports regarding one's trading and also includes templates for business planning and journaling.

It's worth looking into many different journal formats to see what works best for you. Some people keep audio journals by dictating their notes. There is no one best way to keep a journal; the key is keeping entries doable and informative, so that entries can lead to concrete goals and actions to improve trading.

.

Here are the web versions of the broadcast:

George, Ritholtz Discuss Corporate Earnings, Housing: Audio

Oct. 21 (Bloomberg) — David George, an analyst at Robert W. Baird & Co., and Barry Ritholtz, chief executive officer and director of equity research at Fusioniq, talk with Bloomberg’s Ken Prewitt about U.S. corporate earnings and housing.

Listen/Download

Bianco Says Cheap Financing Will Drive Stock Rally: Audio

Oct. 21 (Bloomberg) — Jim Bianco, president of Bianco Research LLC, talks with Barry Ritholtz, chief executive officer and director of equity research at Fusioniq, and Bloomberg’s Ken Prewitt about capital flows and the equity market.

Listen/Download

Kotok Calls Build America Taxable Muni Bonds Attractive: Audio

Oct. 21 (Bloomberg) — Barry Ritholtz, chief executive officer and director of equity research at Fusioniq, and David Kotok, chief investment officer at Cumberland Advisors Inc., talk to Bloomberg’s Ken Prewitt about U.S. corporate earnings, housing, equity and bond markets, and Federal Reserve monetary policy.

Listen/Download

Submitted by Nic Lenoir of ICAP

Well, today for once played out like we expected at least. Upon failure of breaking forcefully through 1,070/1,075 early in the session, we did have one of those lightening fast no volume rally. However we were positioned for it following the early morning game plan. Only surprise is almost that we did not go all the way challenge the highs at 1,098. I guess we had to leave a little bit of work for the Asian session.

From the lows this morning we have what looks like and a-b-c so c might not be complete yet. As I type Amex's earnings came out better than expected, so needless to say that will add a little fuel to our fire. I expect this move to be a 5 leg impulse that will top between 1,098 and 1,007, where I will be looking closely at the market structure as I think we could have a good shorting opportunity there.

I re-inserted my Dax chart because it has been a great guide through the last volatile days, and so far the price action is a mirror image of last September, so one would be crazy not to keep it in mind.

Note on the daily chart of the S&P future that the MACD has hardly turned in terms of the second derivative. The good news is we have a lot of divergence, and we look very close to turn though. We would recommend considering using some bullets if we open around the highs tomorrow.

In 10Y Treasury futures we failed to break the support this morning as expected, but the upside was relatively limited, partly also because of the push higher in equities. I would expect we test again 117-20/117-24 in the morning, and we would watch again very closely how the market reacts there. We have enough momentum to break, and maybe make it to the 116-20 support but that seems a bit of stretch, the odds are rather to retrace here up to 118-08/118-24 before anything material happens.

Good luck trading,

Nic   

Just an update on the status of the Fed's Treasury and MBS purchase programs.

From the Atlanta Fed weekly Financial Highlights:

From the Atlanta Fed:

The Fed has purchased a total of $297 billion of Treasury securities through October 21, bringing it about 99% toward its goal. Of these purchases, $4.5 billion have been TIPS.

Last week, the Fed made a purchase on October 13 for $2.95 billion in the seven-to-10-year sector.

The NY Fed purchased $1.05 billion more yesterday, so there is just $2 billion more to come over the next week.

And from the Atlanta Fed:

The Fed purchased a net total of $16.1 billion of agency-backed MBS between October 8 and 14, bringing its total purchases up to about $945 billion, and by year-end [CR Note: by the end of Q1] the Fed will purchase up to $1.25 trillion.

The Fed purchased an additional $18.1 billion net in MBS over the last week, bringing the total to $963 billion.

The Treasury purchases will end next week - and will probably make the news. The MBS purchases are ongoing.

Market update:

The third graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

A $286 million loan BWIC is being marketed, with a 10:00 am deadline tomorrow for bid submissions. The lineup of holdings is not too remarkable so it is not immediately possible to determine who the unlucky imploder may be. However, as it has been over a month since the last BWIC hit the market, there are rumors that this could be a Galleon-related unwind. The largest names in the BWIC include Hertz, ServiceMaster, Windstream, QVC and Sungard loans, at $15, $11.2, $9.7, $9.5 and $9.1 million respectively.

Full list below.

 

Robert Waldmann

The average person thinks he has higher than average intelligence. This is an empirical fact [citation needed]. It is not incorporated into standard finance theory, but it matters a lot. It has been argued that the high volume of transactions on financial markets can be understood easily. If two people with equal quality information each think they have better information than the other, each will think that he or she benefits when they take bets against each other [citation needed plus why didn't I think of this].

This psychological fact can also explain bubbles. A bubble can grow and burst if people don't recognise that it is a bubble. A bubble can also grow and burst even if people recognise there is a bubble, but each thinks that he or she will be the first to detect the peak. This theory of bubbles fits the sort of things traders say during bubbles. The standard phrase for this sort of reasoning is the greater fool hypothesis.

Human overconfidence makes us very tempted by the greater fool hypothesis, even if we are the greatest fool. Given the risks, overconfident people self select into finance. Given personel management at financial firms, people who have been lucky will have power over lots of money -- there is no way to tell luck from skill. They will also tend to be overconfident -- there is no way to tell luck from skill.

It is trivially easy to write a model in which it is very important that everyone thinks they will detect something sooner than everyone else. It doesn't even matter much what that something is.



This model is unusually pointless. The point should be obvious given the discussion above. In fact, I think the point was obvious to many people long before I wrote this post. The model clarifies nothing. If you understand the point it is supposed to illustrate, you might be able to follow it and gain nothing.

A very simple model of bubbles. Time is discrete. Agents are risk neutral. There are two assets. One is a risk free asset which pays interest rate r. The risk free asset is a storage technology, so the amount of risk free asset is not in fixed supply. There is one share which pays dividend r each period. Population is a continuum normalized to one (each agent is infinitesimal compared to the market). Agents are not allowed to hold short positions (borrowing is shorting the storage technology). The last assumption is just needed to keep each agent's demand bounded given risk neutrality.

There is a random variable X_t which is equal to 0 with proability a(t) and equal to zero with probability 1-a_t. I am going to be very vague about a(t) but just note that it grows so there is some big T such that a(T)=1. This will amount to saying that everyone knows the bubble must burst by T+2.

Agents do not see this variable instantly. If the variable is 0 at period t, then agents perceive that it is zero in period t+2. Agents know this is true of all other agents and was true of him in the past, but each thinks that he has extra alertness and perceives X_t in period t+1. For the moment agents don't understand that other agents are over confident. They think the other agents know that the other agents detect X_t in period t+2.

What can happen to the price P_t of the share in this model ? It is easier to ask what can't happen, since many things can happen.

One possibility is that P_1 = 1 all the time. Both assets are, in practice, riskless paying return r with certainty.

It is alos possible that there will be an unsustainable speculative bubble. P_t can be greater than one when X_t-2 = 1 and fall to one when X_t-2 = 0.

First the standard assumption. All agents are rational. No agent is over confident. Each knows he sees X_t after the same 2 period lag as everyone else.
There can be a sunspot equilibrium only if P can go to infinity.

X_t-3 = 0
X_t = 1

1)x_(t-3) = 0, P_t-1=0
2) X_(t-2)= 1 P_t= P_t
3) if X_(t-1) = 0, P_(t+1) = 1
if X_(t-1)= 0 P_(t+1) = (P_t(1+r)-a(t-1)P_(t-1) + r)/(1-a(t-1))

Formula 3 also gives P_(t+1) conditional on P_(t+2) and X_t=1 and etc.
This would work fine except for the assumption that there is a T such that a(T) = 1. That assumption amounts to the assumption that everyone knows the bubble must burst by period T+2 at the latest. There will be a zero in the denominator of the formula for X_(T+1).

So by backwards induction, there can be no bubble.
Ignoring that, imagine an overcondent agent. An overconfident agent is sure that in period t+1 the price will be greater than one so long as X_(t-2) = 1. An overconfident agent thinks he is seeing the signal one period before he really sees it, so he thinks this means X_(t-1)=1. This means an overconfident agent will put any amount of his money (up to all of it) in the risky asset in period t so long as equation 4 holds

4) X_(t-2)= 1 P_(t+1) = (P_t(1+r) - r)

Uh oh. There is no a in that equation. An overconfindent agent thinks the probability of the bubble bursting has nothing to do with his choice in period t, since he is sure that the bubble won't burst in period t+1.

Actually even if agents know all other agents are overconfident, it doesn't matter. It is enough that I think that the other guys definitely won't see the sunspot that says "bubble bursting now" for 2 periods.

Finally, it is not necessary for agents to over estimate the spead at which they detect the signal. If agents actually see the signal after one period, but each thinks that all other agents see it after two periods, then everything works the same except that the subscripts on X are a little less irritating.

Who pays for hip replacements in America? Medicare.

The really important thing, for reformers, is to get the principle of universality established.

These look interesting:

• Kass: The Earnings Season Racket (The Street.com)

• Investors still struggling to put fear behind them (Reuters)

• The growing case for a jobless recovery (Federal Reserve Of Atlanta Blog)

• Home-building rises, but worries persist (WaPo)

• Dollar hegemony for another century (Telegraph)

• Principles written in the blood and tears of lost money (W-Street)

• They Shoot Porn Stars, Don’t They? (Susannah Breslin)

• Microsoft Tries to Shrug Off ‘PC Guy’ Image With Windows 7 (Bloomberg)

What are you reading?

A major component of HFT, server co-location, is now becoming a critical regulatory hot topic. The SEC has told the Nasdaq it will regulate its co-location business going forward. This is occurring even as the SEC is furiously googling terms like co-location and high frequency trading, and watching riveting debates between Michelle Caruso Cabrera and Bob Pisani, to find out just what they mean, and what exactly it is they are supposed to be regulating.

From Traders Magazine

"We have been asked by the SEC and consented to--indeed embraced--their regulation of our co-location business," Eric Noll, a Nasdaq executive vice president in charge of transaction services, told Traders Magazine. "Their goal is to make sure that access to our marketplace is fair. That is also our goal."

Of course, Nasdaq shares some spirited support of co-location, which Mr. Noll forgets to add is a major revenue stream for exchanges:

"Co-location is not going away," Noll added. "But the way the market is evolving is positive. Exchanges are providing it and it's regulated and access is fair."

And just in case the SEC atually wants to figure out what it is that is is supposed to be regulating, here

Co-location is a service offered by market centers and third parties, such as Equinix, that involves making rack space available to firms for their trading servers in facilities near market centers' matching engines. Placing one's trading server nearer to an exchange matching engine reduces communication times, increasing the chances of beating competitors to profitable trading opportunities.

Many of these data centers are in New Jersey where NYSE Euronext is building a 400,000 square foot facility for co-location purposes.

Because of the perception of unfairness, some in the industry have argued more transparency into the allocation practices of exchanges's co-location business is warranted.

Zero Hedge is still waiting for the NYSE's release of its co-location terms as was disclosed to us some time ago. It would be useful to have a benchmark for retail investors of just how much it would cost them to be competitive with the GETCO's and the Goldman Saches of the world, especially now that the cost-benefits of trading on dark pools may be shifting back to open exchanges.

TARP Inspector General Neil Barofsky says in a new report that TARP has allowed the too big to fails to get even bigger, and that:

Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior.

TARP . . . reanimating not only zombie banks, but also zombie markets.

24 Senators and 63 House Representatives have completely lost their minds over pork bellies. Apparently the free market does not work, hog farmers are not making enough money, and the government owes farmers a profit no matter how much stuff they grow or raise.

Please consider USDA Must Buy Pork ‘Immediately,’ Hog Executive Says.

The U.S. Department of Agriculture must make funds available immediately to buy pork to keep hog farmers in business, the head of the second-biggest U.S. producer told a House of Representatives subcommittee.

Government pork purchases worth $100 million have won the backing of a bipartisan group of 87 lawmakers to support prices for farmers, who have lost money since 2007. Hog futures have dropped about 25 percent in Chicago since April 23, when swine flu began making headlines, depressing consumer demand and curbing exports to major markets including China and Russia.

Lawmakers need “to encourage and work with the Secretary of Agriculture to immediately make available” funds for government pork purchases, said Rod Brenneman, the chief executive officer of Seaboard Foods LLC, a unit of Merriam, Kansas-based Seaboard Corp. He testified before a House Agriculture Committee panel that oversees the livestock industry.

Lawmakers led by Senators Al Franken, Democrat of Minnesota, and Richard Burr, Republican of North Carolina, asked Agriculture Secretary Tom Vilsack to increase U.S. spending on pork in letters earlier this month.

The group of 24 senators and 63 representatives asked Vilsack to buy more pork in the year that began Oct. 1 through government food programs. The U.S. Department of Agriculture bought $165 million of the meat a year earlier, including $30 million announced on Sept. 3, according to Justin DeJong, a USDA spokesman.

The USDA may have less to spend on pork this year because of fiscal restraints, Vilsack said in an interview last week. He said the department is reviewing its plans for this year with an eye toward maximizing available funds for pork producers.

“We have to be sure we husband our resources and use them wisely,” he said last week.

No One Owes Farmers A Profit

It is absurd to think the government or anyone else owes farmers a profit anymore than computer consulting corporations or real estate agencies are owed a profit.

Yes farmers have a rough life. But everyone unemployed or underemployed has a rough life now. Farmers are raising too many hogs and prices are low. The solution is to raise fewer hogs, either voluntarily or involuntarily via bankruptcy.

When government steps in and offers price supports it keeps weak producers alive when they should go out of business, it encourages more production of unwanted goods, those goods stockpile up and then finally the US government dumps the excesses on foreign markets at whatever price it can get. The latter is an enormous source of aggravation for struggling emerging market countries.

Economic Madness Is Repeatedly Endless

It is not just the US gone insane over hogs. Please consider Economic Madness Is Repeatedly Endless.

Mad Facts

• The Japanese Government is buying 70,000 swine carcasses even though stockpiles are the highest in 20 years.
• Japan is the world's largest pork importer, stockpiling supplies.
• Japanese consumers are switching to chicken because it is cheaper.
• Japan's "remedy" is an attempt to force pork prices higher.

Does this make any sense at any level?

Lean Hog Futures



The chart shows hog futures are at the low end of a range it has been in for quite some time. In summer of 2008 prices were at the high end of the range. Now farmers have overproduced relative to demand. Left alone the free market would cure this problem in a hurry.

Agriculture Secretary Tom Vilsack said “We have to be sure we husband our resources and use them wisely.”

Wise use of funds is no use at all. The right measure of crop supports is always $0.

Yes farmers have a hard life. One I would not choose. But they chose it, not me. And neither I nor anyone else owes them a profit.

The U.S. Population Clock Projection shows there the estimated population of the US to be 307,758,086 as of 10/22/09 at 18:21 GMT.

That means 308 million people benefit from lower hog prices. How many benefit from higher hog prices?

Here's the deal: we all benefit from a free market where everyone has an equal chance. Policies that give farmers or anyone else an uneven chance are bad for everyone. The US government has no idea what the fair price for lean hogs or pork bellies should be and should stay out of it.

The only possible mission for the USDA would be in regards to health issues and safety, not determination of prices.

Michael Moore vs. GWU student

Michael Moore speaks at George Washington University about his new film "Capitalism: A Love Story". Chad Swarthout, senior at GWU, asks a question about free market economics and the government's role in it, and Moore admits easily that the system we have now is not true capitalism

Moore fails to ever address the original question, so here it is again, Michael, in paraphrase:

Is a free market and a system of private property, which is essentially capitalism, really the problem? Or is it really the fact that we give too much power to the government in which big businesses have a heavy hand in?



In regards to the free market and capitalism, that GWU student would rip Moore to shreds in an actual debate. Unfortunately it was only Q&A with Moore doing all the talking, most of it nonsensical.

For more on Moore please see Death of the 'Soul of Capitalism', a discussion involving opinions of Jack Bogle, Marc Faber, and Michael Moore.

Moore is a socialist parasite dependent on the very free market he criticizes to get his views across. It is very easy describe Moore's socialistic views as well as the views of those those seeking price supports in a single word: Hogwash.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

A key point on the impact of the stimulus on GDP ...

From Christina Romer, Chair, Council of Economic Advisers in Testimony before the Joint Economic Committee: From Recession to Recovery

In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA on GDP and employment. ...

These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.

Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009. By mid-2010, fiscal stimulus will likely be contributing little to growth.
emphasis added

The impact on GDP will be smaller going forward, and according to Dr. Romer, the impact will be around zero by mid next year, and will be a drag later in 2010 (as stimulus is reduced).

The red line in the chart below is not an inverse of the S&P 500. It's actually an intraday chart of the dollar. No sooner than one goes up, the other goes down.

This is turning into an extremely lousy day on my end. Not only is disqus broken, the Zero was down, geronimo had an empty alert - but now the market whipped back up like a mofo and I was forced to go back into cash which wiped out all of yesterday’s gains.

This does NOT look like an a-b-c to me - no matter if we suddenly drop tomorrow. This increasingly looks like a sub dividing third wave in development, which makes me wonder what the fuck yesterday’s drop was, because it wasn’t an a-b-c either by any measure.

I hate to tell you this guys but it’s getting to the point where I cannot trade this market anymore - none of my indicators work anymore and the ’smart’ guys are the guys who simply keep buying every dip. So, I’m outta here for today and hopefully by tomorrow fucking disqus support actually bothers to help me fix this problem.

I remain unable to fix this comment problem and have contacted Daniel over at disqus - so far I have not heard back. This is what I need you guys to do - please send an email to daniel@disqus.com and copy to support@disqus.com - maybe that will ‘inspire’ them to take action.

3:03pm EDT: Here is Daniel’s response:

I understand the issue is frustrating, but encouraging your readers to email me will not make me recognize the problem more. I already think it is important. If you do not think Disqus works for you anymore, I’m sorry to see you go to another service.

Best of luck,

Daniel

We can see the strong correlation between the Aussie dollar vs. U.S. dollar (top chart) and the S&P 500 Index (ES futures; bottom chart) in today's trade. In both cases, a breakout above the morning highs have led to nice upmoves. The ES futures have returned to their multiday range, and the Aussie dollar has moved back into its range dating back to 10/19. The resolution of these ranges is likely to set up the next meaningful trending leg among risk assets.
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Recently we presented our extended thoughts on how it was that the Fed first encouraged massive dollar-denominated, underfunding global positions, and subsequently, when funding became scarce, provided unprecedented capital bailouts to foreign Central Banks. The clip below takes the key theme we introduced and presents some of the political and social implications of this new and accepted doctrine of not just domestic, but global moral hazard, shepherded by the Federal Reserve.

 

 

Stock markets are up 60% plus. How does this rally stack up with previous ones?

Here are some key criteria of what previous 60% rallies have looked like when analyzed across 10 different key economic dimensions :

• Year over Year Retail Sales: 9.3% average in prior 60% rallies versus -5.3% in the current one
• Consumer Confidence: 95.5 average; 53.1 now
• Capacity Utilization: 79.9% average; 66.6% now
• Year over Year Industrial Production: 4.1% avereage; -10.7% now
• ISM: 53.9 average; 52.6 now
• Payroll employment gains over period: 2.2% average; -2.0% now
• Decline in continued unemployment claims from cycle peak: -26.3 average; -11.6% now
• Year over Year growth in total credit market debt: 9.3% average; 3.0% now
• Year over Year growth in household debt: 8.8% average; -0.1% now
• P/E Multiple: 16.8x average; 20.0x now

Data courtesy of Contrary Investor via Zero Hedge

Given that Technology has the largest weighting in the S&P 500, it comes as little surprise that four of the ten largest companies in the index are from that sector. While most would expect to see MSFT near the top of the list, AAPL is currently the fourth largest company in the S&P. The stock that was left for dead...